Coronavirus Aid, Relief, and Economic Security (“CARES”) Act Provides Expansive Tax Relief
Summary of Individual and Business Tax Provisions that May Impact You:
- Tax credit rebates of $1,200 for each eligible adult and $500 for each qualifying child, phased out with AGI starting at $75,000 (single) and $150,000 (joint)
- Expansion of IRA rules including the ability to treat a coronavirus related distribution up to $100,000 as a tax-exempt rollover if repaid within three years or, if not repaid, taxable over a 3-year period with a waiver of the 10% penalty for early withdrawals.
- Expansion of cash charitable deduction rules for 2020, including suspension (or increase) of the charitable deductible ceiling
- Employee Retention Credit allowed for employers whose businesses have been fully or partially suspended or that experienced a 50% reduction in gross receipts in a given quarter
- Employers and self-employed individuals may defer payment of the employer share of Social Security payroll taxes from the date of enactment to the end of 2020, to be payable by the end of 2021 and the end of 2022
- Net operating losses (NOLs) generated in 2018, 2019, and 2020 may be carried back five years; 80% taxable income limitation temporarily repealed until 2021
- Temporary suspension of excess business loss limitation rules for non-corporate taxpayers for 2018-2020
- Acceleration of corporate AMT credits to 2018 and 2019
- Expansion of deductibility of net business interest to 50% of taxable income for 2019 and 2020.
- Technical correction for Qualified Improvement Property (QIP) to treat as 15-year property subject to 100% bonus depreciation, retroactive to January 1, 2018
- Your Windham Brannon tax advisor will work with you to determine how these changes impact you and develop a plan of action, based on your individual circumstances.
On Friday, March 27, the President signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act stimulus package as a result of the COVID-19 outbreak. The stimulus package provides broad tax relief to businesses and individuals, including changes and corrections to tax reform provided under the Tax Cuts and Jobs Act (TCJA) passed just a couple of years ago. The tax provisions are geared to provide significant cash flow relief for both businesses and individuals. Your Windham Brannon tax advisor will work closely with you to determine how these changes impact you and develop a plan of action to maximize your tax benefit opportunities. Further details and breakdown of these provisions are provided below:
Tax Credit Rebates
The CARES Act provides a tax credit of $1,200 for each eligible adult ($2,400 for a joint return) and $500 for each qualifying child. The credit begins to phase out at AGI thresholds of $75,000 for single filers and $150,000 for joint filers and is reduced by 5% of the excess of AGI over the threshold amounts. The refunds will be based on either 2019 or 2018 tax returns, or Social Security Benefit statements if no tax return has been filed. The eligible individual must be a U.S. resident, is not a dependent of another taxpayer, and have a work-eligible social security number.
Changes to Individual Retirement Plans
The CARES Act waives the 10% early withdrawal penalty for any coronavirus related distributions made in 2020 up to $100,000. Further, the qualifying distribution may be treated as a non-taxable rollover if repaid within three (3) years from the date of distribution. To the extent not repaid, the related taxable income may be ratably spread over a three-year period beginning in 2020. Individuals may make an eligible coronavirus related distribution if they, or a spouse or dependent, have been diagnosed with COVID-19, or experience adverse financial consequences as a result of a quarantine, lay-off, or hours reduction due to business issues or lack of childcare. Also, the required minimum distribution (RMD) rules for 2020 are suspended for certain plans.
Expanded Deduction for Charitable Contributions
The CARES Act suspends the 50% AGI limitation for 2020 cash contributions for individuals and expands the corporate limitation to 25% of taxable income. This expanded limitation does not include donations to a donor-advised fund. The CARES Act provides taxpayers that do not itemize an additional charitable contribution deduction of up to $300 in addition to the standard deduction. The Act also increases the limitation on deductions for contributions of food inventory from 15% to 25%.
Employee Retention Credit
Eligible employers whose business is fully or partially suspended due to orders from an appropriate government authority due to the coronavirus, or that have experienced a significant decline in gross receipts, may be eligible to claim an employee retention credit. The credit is a refundable payroll tax credit against the employer’s share of Social Security taxes equal to 50% of wages paid from March 13, 2020, to December 31, 2020, up to a total of $10,000 per employee (i.e., a maximum credit of $5,000 per employee). The credit is structured similarly to the payroll credit for sick and family leave available under the Families First Coronavirus Response Act, although employers may not claim both credits on the same wages. Qualifying wages, which include certain qualified health plan expenses, are paid by businesses during a shutdown order or during a period of significantly declined gross receipts. For those that have experienced a significant decline in gross receipts, the wages are eligible for the credit beginning in the first calendar quarter after December 31, 2019, for which gross receipts are less than 50% of the gross receipts for the same quarter in the previous year, until the gross receipts for the quarter reach 80% of gross receipts for the same quarter in the previous year.
For employers with more than 100 full-time equivalent employees in 2019, only wages paid when the employee was not providing services are eligible for the credit. For employers with 100 or fewer employees, any wages when a business was fully or partially suspended or who experienced a significant decline in gross receipts are eligible for the credit. The credit is provided for wages paid through December 31, 2020.
Payment Deferral of Employer Payroll Taxes
The CARES Act allows for a payment deferral of the 6.2% employer portion of Social Security taxes from the date of enactment through December 31, 2020. The deferred payment is postponed, with 50% due by December 31, 2021, and the remaining 50% due by December 31, 2022.
Net Operating Loss Carryback and Carryforward
Prior to 2018, net operating losses (NOLs) could be carried back two (2) years and carried forward twenty (20) years. The TCJA brought changes by disallowing the carryback period for NOLs generated in 2018 and future years and increasing the carry forward period to an indefinite life. NOLs generated in 2018 and future years that were carried forward, though, could only offset up to 80% of taxable income in the carry forward year.
The CARES Act significantly changes these rules by allowing NOLs generated in 2018, 2019, and 2020 to be carried back for a five (5) year period. Further, the Act temporarily repeals the 80% taxable income limitation for taxable years 2018 through 2020. This carryback provision not only provides significant opportunity to increase current cash flow but also allows the greatest tax benefit of those losses by allowing them to offset income at pre-TCJA rates (35% for corporations and 39.6% for individuals) rather than offsetting future income otherwise taxed at the post-TCJA maximum rates of 21% and 37% for corporations and individuals, respectively.
Suspension of Excess Business Loss Limitation
The TCJA provided a limitation on the amount of business losses incurred after December 31, 2017, that may be claimed by a non-corporate taxpayer to $250,000 ($500,000 for a joint return), with any excess loss treated as a net operating loss carry forward to the following year. The CARES Act suspends the excess business loss limitation rules for 2018, 2019, and 2020. This allows taxpayers the ability to file amended returns to claim the tax benefit of any excess losses previously disallowed.
Accelerate Refundable Corporate Minimum Tax Credits
Corporations subject to alternative minimum tax (AMT) in pre-2018 years were allowed a tax credit in future years for AMT paid, to the extent that the credit did reduce the tax liability below the AMT threshold for that carry forward year. The TCJA repealed AMT for corporate taxpayers for tax years beginning after December 31, 2017. To obtain a refund for the AMT paid in previous years, the TCJA allowed corporate taxpayers to request a refund of the AMT credits over the years 2018 – 2021. The CARES Act accelerates the refundable credit so that 100% may be claimed by 2019 rather than spreading out to 2021. The Act also contains a provision that allows corporate taxpayers to elect to claim the credit entirely in 2018, which provides the opportunity to file an amended 2018 tax return to claim the refund, rather than waiting until the 2019 tax return is filed.
Expanding the Business Interest Deduction
The TCJA provided that the deduction for business interest for certain taxpayers was generally limited to 30% of taxable income for years beginning in 2018. The CARES Act modifies and expands the deductibility of business interest in 2019 and 2020 by allowing businesses to increase the taxable income limitation from 30% to 50%. It also allows business taxpayers for 2020 to elect to apply the 50% limitation based upon 2019 taxable income rather than 2020 taxable income. This election would provide a tax benefit for an increased interest deduction in 2020 to the extent that 2019 taxable income is greater than the 2020 taxable income amount.
Correction to Allow Bonus Depreciation for Qualified Improvement Property
To fix what has been termed the “retail glitch”, referring to an error in the TCJA that unintentionally excluded certain qualified improvement property (QIP), which is general improvements to the inside of commercial buildings, from 100% bonus depreciation, the CARES Act assigns a 15-year cost recovery period for such property, thereby making it 100% bonus eligible. This change takes effect as if it were correctly treated within the TCJA, which means that the change becomes effective retroactive to January 1, 2018. This effective date allows taxpayers to consider the alternatives of either filing amended returns to claim the benefit, or “catching-up” the depreciation in the current year through a change of accounting method.